Global financial market wrap March

Financial markets have experienced volatility over recent months as investors digest mixed economic data, evolving central bank policy, and rising geopolitical tensions, with the current conflict in the Middle East sending global markets in all directions. While some indicators have softened, the broader economic backdrop remains relatively resilient. From an investment perspective, the key question is whether these developments represent short-term issues or signals of a more sustained shift in global growth and inflation trends.

The Australian economy continues to demonstrate resilience, particularly in the labour market. The unemployment rate held steady at 4.1% in January, suggesting the labour market remains tight and the economy is still operating close to capacity. Strong employment conditions typically support household consumption and corporate earnings, but they also complicate the inflation outlook.

Inflation remains the primary concern domestically. Headline inflation held at 3.8% year-on-year in January, remaining above the Reserve Bank of Australia’s (RBA) target band of 2–3%. In response to these persistent pressures, the RBA raised the official cash rate to 3.85% in early February, signalling a more hawkish stance than markets had previously expected.

For investors, this environment presents a mixed picture. On the one hand, economic activity remains relatively robust and corporate earnings have generally held up. On the other hand, higher interest rates create headwinds for interest-rate-sensitive sectors such as property, consumer discretionary stocks and fixed income.

Overall, Australia’s economic fundamentals remain solid, but the path for inflation will likely determine the direction of interest rates and equity market performance in the months ahead.

The United States continues to play a pivotal role in shaping global market sentiment. Encouragingly, the labour market remains resilient, with January nonfarm payrolls rising by approximately 130,000 jobs, beating expectations and reinforcing confidence that the economy retains underlying momentum.

Consumer sentiment has also shown signs of improvement. The University of Michigan consumer sentiment index rose to 57.3 in February, marking its highest reading in six months. Improving consumer confidence is significant given that household spending accounts for roughly two-thirds of US economic activity.

However, the outlook is not without challenges. US GDP growth slowed to around 1.4% annualised in the fourth quarter of 2025, raising questions about whether the economy is losing momentum. Inflation also remains somewhat sticky, with core PCE inflation still sitting around 3.0%, above the Federal Reserve’s 2% target.

Markets are also closely watching policy developments. Recent uncertainty around US trade policy and tariff authority has contributed to bouts of risk-off sentiment.

In short, while the US economy remains relatively strong, markets are navigating a delicate balance between slowing growth and persistent inflation, factors that will ultimately shape Federal Reserve policy and asset prices.

Economic sentiment in Europe has improved modestly after a prolonged period of weakness. One encouraging sign has been the turnaround in the industrial sector. The Eurozone manufacturing PMI recently rose above the 50 expansion threshold, reaching its highest level in 44 months. This improvement suggests that manufacturing activity may finally be stabilising following a prolonged slowdown.

Inflation trends have also begun to move in a more favourable direction. In the United Kingdom, headline CPI inflation eased to 3.0% annually, down from 3.4% in late 2025. While still above the Bank of England’s target, the downward trajectory is encouraging and has increased expectations that monetary policy may eventually ease.

European equity markets have responded positively to these developments, particularly as investors begin to price in the possibility of lower interest rates and improving industrial activity.

However, Europe remains vulnerable to global trade dynamics, energy price shocks and geopolitical developments. As a result, while sentiment has improved, the region’s recovery remains fragile and dependent on broader global conditions.

Asia has produced a more mixed set of signals. In Japan, markets reacted strongly following Sanae Takaichi’s decisive election victory, which investors interpreted as supportive of economic reform and expansionary fiscal policy. Japanese equities rallied as markets priced in a more proactive economic strategy and continued policy support.

China, however, remains a source of concern for global investors. Economic momentum continues to weaken, particularly in the services sector. The January non-manufacturing PMI fell to 49.4, a 37-month low and below the 50 threshold that separates expansion from contraction. This decline reinforces the view that China’s post-pandemic recovery remains uneven, with structural challenges in the property sector and broader demand weighing on growth.

Given Australia’s economic ties to China through trade and commodity demand, sustained weakness in the Chinese economy could have meaningful implications for Australian exports and corporate earnings.

Our base view remains that global growth continues, albeit unevenly across regions. Markets are likely to experience periods of volatility, particularly as investors respond to economic data, policy developments and geopolitical events.

For investors, this environment reinforces the importance of diversification, disciplined portfolio construction, and maintaining a medium- to long-term investment horizon. While short-term market movements can be unsettling, they often create opportunities to add exposure to quality assets aligned with long-term structural growth themes.

In our view, patience and prudent portfolio positioning remain the most effective strategy as markets navigate this evolving global landscape.